And now for the youth!

Italy’s president Giorgio Napolitano was probably looking forward to his Life Senator office where he would have been able to complete his long political career without much stress. However, following a week that saw the effective demise of Bersani and the PD party, and the ineffective attempts at finding a suitable candidate to succeed Napolitano, the president had to agree to be re-elected for a theoretical new 7-year term that would see him in the middle of his nineties at the end of the second term. After witnessing the resignation of a Pope after 600 years, Italians are now once more witnessing history in the making with the first time a president gets a second term.

However, after being the first president to be re-elected for a second term, Mr Napolitano picked Mr Letta to be the second youngest Prime Minister in history. Mr Letta comes from the ‘right’ wing of the left leaning Democratic Party and certainly has a back corridor connection to Berlusconi through his uncle, Gianni Letta.

Many international investors are asking, ‘what’s going on in Italy?’ In simple terms, Italy is going through a sophisticated ‘Italian spring’. With one out of four voters opting for Grillo, Italians have shown to the politicians that they mean business. The old equilibrium no longer works. Political parties are totally discredited, and the PD has basically imploded. There are now two scenarios in front of Italy. The first one sees Letta succeeding in implementing reforms in labour markets and the election system, which will allow for new elections late next year. The second would see a failure of Mr Letta who could fall on Berlusconi’s legal troubles which could still prompt him to leave the government. This would be a disastrous scenario as it would play straight into Grillo’s hands, who is already beginning to lose support. The next 3 months will be key.

Italian renaissance

There are a number of ways to describe economic cycles, which oscillate between expansion and contraction. Some of the best known are for example, a U shape, recession, short stagnation and then quick recovery, or a V Shape, where the recession is immediately followed by strong recovery. There are also W shapes, where after a recession and an apparent recovery there is a double dip. None of these letters really apply to Italy at this juncture. In fact the cycle it has been going through, resembles more a ‘bathtub’.

The advent of the Napolitano-Letta legislature could finally signal an emersion into the other ‘shore’ of the bathtub. This ‘grand coalition’ young government could achieve what Monti wasn’t able to complete, i.e. serious labour market reforms coupled with a sharp reduction in taxation. The key will be to convince Euro-Germany that a temporary relaxation of the 3% golden rule will be a pre-requisite for the return of growth.

Should this happen, investors would be wise to start looking more seriously at Italian opportunities in the distressed credit and real estate sectors, which are still benefiting from historically low rates.